In a recent DerivSource webinar, panelists explored the impact of financial regulation on collateral management operations and the strategies firms can adopt to improve efficiency amidst regulatory changes. During this event many attendees posed questions to the panelists and webinar speaker, Moris Danon CFA, Product Manager, ProtoColl, at Omgeo addresses some of these questions.
Question: Did the delays to BCBS/IOSCO non-cleared derivative required also delay similar U.S. regulations?
MD: The US Regulators are expected to follow the non-cleared derivatives margining extension announced by BCBS/IOSCO in March 2015, but I personally have not heard an official announcement by the CFTC or the Prudential Regulators.
Question: What role does collateral optimization would play in near future? Will it become as standard service model?
MD: As the asset types accepted as collateral expands, collateral optimization is expected to increase in importance and be utilized by more institutions. Also, when interest rates increase from their historically low levels, cheapest to deliver optimization methods incorporating funding costs will yield higher benefits, drawing increased industry interest.
Question: How can we best start preparing for non-clearing derivative requirements without final rules in place?
MD: While there are a number of important rules that are not harmonized across jurisdictions and not yet finalized, there are many elements stated in the BCBS/IOSCO framework and the ESMA, Prudential Regulators and CFTC’s margin requirements for uncleared swaps regulations that are certain to be the final rules. Companies can analyze these documents to determine if they will be subject to variation margin, initial margin or both, and based on their non-cleared derivatives notional amounts and the phases outlined in the regulations, which dates the regulations will apply to them. Financial Institutions doing business across continents will need to determine which jurisdictions they fall under, and analyze the requirements of those jurisdictions. Understanding the various requirements and the implementation dates will enable planning for the necessary organizational and operational changes, and the technology solutions to support the collateral operations.
Question: Is the Industry integrating their listed derivatives and OTC derivatives organizations, including people, technology and daily/weekly processes?
Many organizations are moving, or planning to move towards consolidating their collateral management silos; integrating Listed and OTC Derivatives organizations, teams and technologies.
Question: Regarding WGMR can you briefly discuss the calculation of hypothetical IM and VM requirements?
MD: CFTC September 2014 Regulations: “The proposal would require each CSE (Covered Swap Entity) to calculate hypothetical initial and variation margin amounts each day for positions held by non-financial entities that have material swaps exposure to the covered counterparty. That is, the CSE must calculate what the margin amounts would be if the counterparty were another SD (Swap Dealer) or MSP (Material Swap Participant) and compare them to any actual margin requirements for the positions. These calculations would serve as risk management tools to assist the CSE in measuring its exposure and to assist the Commission in conducting oversight of the CSE.”
ISDA’s comment letter to the CFTC (November 2014) states: “This requirement raises a number of difficult issues and should be deleted. First, it is unclear why this requirement is imposed. The rules do not require CSEs to collect margin from any non-financial end users. The requirement is not necessary for risk management purposes, because the Commission’s existing rules require CSEs to maintain risk management programs. In addition, this “hypothetical” requirement is cumbersome because a non-financial end user would need to provide on-going updates as to swap exposure levels to a CSE so that the CSE could determine whether the end user meets the MSE threshold. There is no other reason for non-financial end users or their counterparties to monitor the MSE test. Finally, the language of the requirement is not entirely clear: it refers to the “material swaps exposure to the covered counterparty / covered swap entity” but MSE is not calculated with respect to one counterparty.”
* You can watch the On Demand webinar “How to Achieve Cohesive Collateral Management Amidst Regulatory Reform”.
